Structure of Equity Market and Derivatives

Market in Hong Kong

HKEx
company of

Topic 1

is the holding

The Stock Exchange of Hong Kong Limited

Introduction to
Securities Market and
Derivatives Market

Hong Kong Futures Exchange Limited

Hong Kong Securities Clearing Company
Limited
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Structure of Equity Market and Derivatives

Market in Hong Kong

Structure of Equity Market and Derivatives

Market in Hong Kong

HKEx was listed in June 2000 following

the integration of Hong Kong's securities
and derivatives markets.

Hong Kongs stock market was the sixth largest

in the world and the second largest in Asia in
terms of market capitalisation as at the end of
September 2012.

As a market-driven organisation,
answerable to its shareholders, HKEx
competes vigorously for opportunities in
the region and around the world.

Hong Kong was the most active market for

initial public offering (IPO) funds raised
globally in 2009, 2010 and 2011.
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Structure of Equity Market and Derivatives

Market in Hong Kong

Structure of Equity Market and Derivatives

Market in Hong Kong

A wide variety of products are traded in the

stock market, ranging from

For the derivatives market, the Hong Kong

Futures Exchange (HKFE) and the SEHK
offer a wide range of futures and options
products, including

ordinary shares to
options,
warrants,
Callable Bull Bear Contracts (CBBCs),
Exchange Traded Funds (ETFs),
Real Estate Investment Trusts (REITs),
units trusts and
debt securities.
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index futures,
Stock futures,
interest rate futures,
bond futures,
gold futures,
index options and
stock options.

Structure of Equity Market and Derivatives

Market in Hong Kong

Structure of Equity Market and Derivatives

Market in Hong Kong

The transactions on the two exchanges are cleared

and settled through their three associated clearing
houses, namely,

As at the end of October 2012,

19
overseas exchanges and market operators
were authorised as automated trading
services providers to offer their trading
services to institutions in Hong Kong.

the Hong Kong Securities Clearing Company (HKSCC),

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the Stock Exchange of Hong Kong Options Clearing

House Company (SEOCH) and
the Hong Kong Futures Exchange Clearing
Corporation (HKCC).
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Structure of Equity Market and Derivatives

Market in Hong Kong

Structure of Equity Market and Derivatives

Market in Hong Kong
Hong Kongs debt market has developed into one
of the most liquid markets in the region.

Apart from the stock market and the futures

market, there is also an active over-the-counter
market which is mainly operated and used by
professional institutions and trades

The Central Moneymarkets Unit (CMU) Service,

established in 1990, is operated by the Hong Kong
Monetary Authority (HKMA) to provide a
clearing, settlement and custodian system for

swaps,
forwards and options in relation to equities,
interest rates and
currencies.

Exchange Fund Bills and Notes (EFBNs),

Hong Kong Government Bonds and
other private debt securities.

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Structure of Equity Market and Derivatives

Market in Hong Kong

Structure of Equity Market and Derivatives

Market in Hong Kong

The Chinese Gold and Silver Exchange

Society has provided a platform for gold
trading in Hong Kong since the early 20th
Century.

Main Board

It launched the Renminbi Kilobar Gold in

2011.
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Equity Securities

Depositary Receipts (HDRs)

Equity Warrants

Debt Securities
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Structure of Equity Market and Derivatives

Market in Hong Kong
Investment Companies

Structure of Equity Market and Derivatives

Market in Hong Kong

GEM Growth Enterprise Market

Unit Trusts/Mutual Funds

Exchange Traded Funds (ETFs)
Real Estate Investment Trusts (REITs)
Other Unit Trusts/Mutual Funds

Equity Securities
Equity Warrants

Structured Products
Derivative Warrants (DWs)
Callable Bull/Bear Contracts (CBBCs)
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Trading Only Securities

Structure of Equity Market and Derivatives

Market in Hong Kong

Stock Code Allocation Plan

Stock codes
Ranges
00001-09999

Structure of Equity Market and Derivatives

Market in Hong Kong
Sub-ranges
02800-02849
03000-03199

Updated: 29 June 2012

ETF (Exchange Traded Funds)

To be allocated for new listing

04000-04199
Notes)

HKMA EFN (Exchange Fund

Securities listed on the Main

Board and GEM and
information pages
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04200-04299

HKSAR Government Bonds

04300-04329

Other debt securities

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Structure of Equity Market and Derivatives

Market in Hong Kong
Sub-ranges
06200-06499
Receipts
06300-06399
securities

Structure of Equity Market and Derivatives

Market in Hong Kong
Ranges
10000-29999

Hong Kong Depositary

(HDRs)
HDRs which are restricted

Sub-ranges
10000-10999

(RS) under US federal securities

laws.

Derivative Warrants (DWs)

DW with underlying assets listed

outside Hong Kong, basket

warrants
and exotic warrants

08000-08999

GEM securities and

GEM information pages

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Structure of Equity Market and Derivatives

Market in Hong Kong
Ranges
30000-59999
60000-69999

70000-79999

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Structure of Equity Market and Derivatives

Market in Hong Kong
Ranges
80000-89999
Sub-ranges
80000-83999

For future use

Callable Bull/Bear Contracts
(CBBCs)

Products traded in Renminbi

Equity, Equity warrants and
Exchange Traded Funds listed

on
the Main Board and
Growth Enterprise Market

For future use

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(GEM)
82800-82849
83000-83199

Exchange Traded Funds (ETFs)

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Structure of Equity Market and Derivatives

Market in Hong Kong
Sub-ranges
84000-86999
85900-86029
86600-86799
of

Structure of Equity Market and Derivatives

Market in Hong Kong
Sub-ranges
87000-87999

Debt Securities
Other debt securities
Bonds of Ministry of the Finance

Real Estate Investment Trusts

(REITs) and Unit

Trusts/Mutual

87100-87999

Funds other than ETFs

Real Estate Investment Trusts
(REITs) and Unit Trusts/Mutual
Funds other than ETFs
For future use

89000-89999

Derivative Warrants (DWs)

87000-87099

the Peoples Republic of China

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Structure of Equity Market and Derivatives

Market in Hong Kong

Structure of Equity Market and Derivatives

Market in Hong Kong

Securities Trading Mechanism of the Exchange

Securities Trading Mechanism of the Exchange

During the Continuous Trading Session, the

system accepts

The trading system of the Exchange is an orderdriven system.

During the Pre-opening Session, the system accepts
at-auction and
at-auction limit orders only.

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limit,
enhanced limit and
special limit orders only, with an option for an
"All-or-Nothing Qualifier" that confines the order
to be either executed immediately in full or
rejected, without being written into the central
order book.

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Structure of Equity Market and Derivatives

Market in Hong Kong

Structure of Equity Market and Derivatives

Market in Hong Kong

Securities Trading Mechanism of the Exchange

Securities Clearing

Trading is conducted through

CCASS/3 is a new generation of the

Central Clearing And Settlement System
implemented by Hong Kong Exchanges
and Clearing Limited (HKEx) to meet
future market development needs.

terminals in the Trading Hall of the Exchange or

through the off-floor trading devices at Exchange
Participants' offices.

Automatic Order Matching and Execution System

("AMS/3")
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Structure of Equity Market and Derivatives

Market in Hong Kong

With HKATS, orders are placed electronically

into the Central Orderbook .

The system automatically matches the

corresponding buy or sell orders in real-time
based on price/time priority.

The executed trade is reported back to the Trader

who can then confirm the trade immediately with
his client.

Structure of Equity Market and Derivatives

Market in Hong Kong
Derivatives Trading Mechanism

Derivatives Trading Mechanism

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At the same time, the trade information, depending

on what product the trade relates, is transmitted to
the HKFE Clearing Corporation Ltd (HKCC) for
non-stock options
or
The SEHK Options Clearing House Ltd (SEOCH)
for stock options
where appropriate for registration and clearing.
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Structure of Equity Market and Derivatives

Market in Hong Kong

SFC and Regulatory Framework

Legislative Regulatory framework in HK:

Derivatives Clearing

The securities and futures markets in Hong Kong

are currently governed by the Securities and
Futures Ordinance (SFO).

DCASS is the derivatives clearing and

settlement system for the derivatives
products of Hong Kong Exchanges and
Clearing Limited (HKEx) and was
launched in April 2004.

The SFO consolidates and modernises the 10

previous ordinances regulating the securities and
futures markets. The primary legislation and the
subsidiary legislation commenced operation on 1
April 2003.
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SFC and Regulatory Framework

SFC and Regulatory Framework

Securities and Futures Commission(SFC)

Who SFC regulates:

Role
The principal regulator of Hong Kongs
securities and futures markets is the Securities
and Futures Commission (SFC), which is an
independent statutory body established in
1989 by the Securities and Futures
Commission Ordinance (SFCO).

Brokers, investment advisers, fund

managers and intermediaries carrying out
the following activities:
Dealing in securities
Dealing in futures contracts
Leveraged foreign exchange trading
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SFC and Regulatory Framework

SFC and Regulatory Framework

How SFC regulates:

Advising on securities
Advising on futures contracts
Advising on corporate finance
Providing automated trading services
Securities margin financing
Asset management
Providing credit rating services

Set licensing standards to ensure that all

practitioners are fit and proper
Approve licences and issue codes and guidelines
to inform the industry of expected standards of
conduct and set financial resources requirements
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SFC and Regulatory Framework

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SFC and Regulatory Framework

Monitor licensees financial soundness

and whether they comply with the relevant
ordinances, codes and guidelines
Handle and investigate complaints against
misconduct of licensees, and take action if
necessary.
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SFC and Regulatory Framework

SFC and Regulatory Framework

Regulation of Intermediaries:

The SFO stipulates 10 types of regulated

activity and provides detailed definition for
each of them.

To ensure that the Hong Kong securities and futures

industry abide by high standards, SFC requires that
individuals and corporate entities meet qualifying
criteria to enter the industry and to observe the
relevant laws and regulatory requirements as
intermediaries.

These activities include:

Policy initiatives on licensing and compliance issues

that we developed are reviewed from time to time to
keep abreast of market development.

Type 1 Dealing in securities

Type 2 Dealing in futures contracts
Type 3 Leveraged foreign exchange trading
Type 4 Advising on securities
Type 5 Advising on futures contracts

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SFC and Regulatory Framework

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SFC and Regulatory Framework

Type 6 Advising on corporate finance

Type 7 Providing automated trading services
Type 8 Securities margin financing
Type 9 Asset management
Type 10 Providing credit rating services

Publicly offered investment products:

SFC authorisation involves the review of offering
documents, and in some cases the structural features
of a particular product, to see if certain impartial
benchmarks are met and the required information is
disclosed.

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SFC and Regulatory Framework

SFC and Regulatory Framework

List of investment products:

Market Infrastructure & Trading:

1. Closed-End Funds
2. Exchange Traded Funds
3. Investment-Linked Assurance Schemes (ILAS)
4. Mandatory Provident Funds
5. Paper Gold Schemes
6. Pooled Retirement Funds
7. Real Estate Investment Trusts
8. Structured Investment Products
9. Unit Trusts & Mutual Funds
10.Unlisted shares and debentures

SFC supervises market operators, namely, the

exchanges, clearing houses, share registrars and
alternative trading platforms.
To enhance operations of Hong Kong's markets and
to ensure they evolve in stride with macro
international developments, SFC introduces new
rules from time to time (such as those governing
short-selling and over-the-counter derivatives) and
refine existing rules when the need arises.
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SFC and Regulatory Framework

SFC and Regulatory Framework

Listing & Takeovers:

Regulations of listed companies via SEHK

As the frontline regulator of listed companies, the
Stock Exchange of Hong Kong Ltd (SEHK) is vested
with the statutory duty to ensure, so far as reasonably
practicable, that the Hong Kong markets are fair,
orderly and informed.

SFC seeks to:

safeguard the interest of investors, and
promote changes to laws and regulations which
encourage market development / provide for the
fairness, efficiency, competitiveness, transparency
and orderliness of the securities and futures market.

As the statutory regulator of both the securities and

futures markets, SFC, among others, supervises and
monitors SEHKs performance of its listing-related
functions and responsibilities.
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SFC and Regulatory Framework

SFC and Regulatory Framework

Enforcement:

Enforcement:

The Securities and Futures Ordinance empowers SFC

to mete out disciplinary measures and prosecute
offenders to combat misconduct and crimes in the
securities and futures markets.

In fighting market misconduct, SFC has recourse to

the Market Misconduct Tribunal and the law
courts.
Where appropriate, SFC also works with domestic
and overseas regulatory bodies to conduct various
investigations.

SFCs surveillance, inspection and disciplinary work

extend beyond listed companies and licensees to
market participants, including investors.
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Roles and Functions of Market

Participants

Roles and Functions of Market

Participants

In the financial markets, there is a flow of funds

from one group of parties (funds-surplus units)
known as investors to another group (fundsdeficit units) which require funds.

Individual Investors:

However, often these groups do not have direct

link. The link is provided by market
intermediaries such as brokers, mutual funds,
leasing and finance companies, etc.

Individuals provide funds by subscribing to these

security or by making other investments

These are net savers and purchase the securities

issued by corporations.

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Roles and Functions of Market

Participants

Roles and Functions of Market

Participants

Institutional investors:

Retail investors:

an organization such as a mutual fund, a corporation,

insurance firm, bank, a retirement fund, bank,
insurance company, and the like that is financially
advanced and puts up large investments, often found
in sizable portfolios.

Beneficial Shareholders refers to retail investors

who carry shares of their investment with a broker or
at a bank. The bank or broker, possess the investment
for such a shareholder.
Registered Shareholders refers to retail investors
holding shares of investments privately with the
issuer. Such registered shareholders keep original
copies of investment certificates.

Due to such sophistication, institutional investors are

financial market participants often seeking out private
arrangements of securities.
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Roles and Functions of Market

Participants

Roles and Functions of Market

Participants

Corporations:

Corporations:

The corporations are net borrowers.

Sometimes, the corporations invest excess funds,

as individuals do.

They require funds for different projects from

time to time.

The funds raised by issue of securities are invested

in real assets like plant and machinery. The
income generated by these real assets is
distributed as interest or dividends to the investors
who own the securities.

They offer different types of securities to suit the

risk preferences of investors
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Roles and Functions of Market

Participants

Roles and Functions of Market

Participants

Government:

Government:

Government may borrow funds to take care of the

budget deficit or as a measure of controlling the
liquidity, etc.

Government makes initial investments in public

sector enterprises by subscribing to the shares,
however, these investments (shares) may be sold to
public through the process of disinvestments.

Government may require funds for long terms

(which are raised by issue of Government loans)
or for short-terms (for maintaining liquidity) in
the money market.
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Roles and Functions of Market

Participants

Roles and Functions of Market

Participants

Regulators:

Market Intermediaries:

Financial system is regulated by different

statutory bodies.

There are a number of market intermediaries

known as financial intermediaries or merchant
bankers, operating in financial system.

The relationships among other participants,

the trading mechanism and the overall flow
of funds are managed, supervised and
controlled by these statutory bodies.

These are also known as investment managers or

investment bankers.

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Securities Market in China

Securities Market in China

China's reform and opening-up starting policy

in the late 1970s has boosted the initiation and
development of its capital market.

A Share shares of the Renminbi currency

that are purchased and traded on the Shanghai
and Shenzhen stock exchanges.

In 1990, Shanghai Stock Exchange

and Shenzhen Stock Exchange
were founded, marking the formation of a
nationwide capital market.

B Share shares of the Renminbi currency that

are owned by foreigners who cannot purchase
A-shares due to Chinese government
restrictions.

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Securities Market in China

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Securities Market in China

Hang Seng China Enterprises Index

was launched one year after the first
H-share company was listed on the Stock
Exchange of Hong Kong (SEHK).

H Share the shares of companies

incorporated in mainland China that are
traded on the Hong Kong Stock Exchange.
Many companies float their shares
simultaneously on the Hong Kong market and
one of the two mainland Chinese stock
exchanges.

It tracks the performance of mainland China

enterprises with H-share listings in Hong Kong.

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Securities Market in China

Securities Market in China

Hang Seng China Enterprises Index

Current Constituents: 40
168
358
386
390
489
728
753

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Securities Market in China

1288
1336
1398
1800
1898
1988
2238
2318
2328
2333
2338

763
857
902
914
916
939
998
1066
1088
1099
1157
1171

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Securities Market in China

2600
2601
2628
2883
2899
3323
3328
3968
3988
6030
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As of Dec, 2012

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Securities Market in China

Securities Market in China

Red Chip
stocks of mainland China
companies incorporated outside mainland
China and listed in Hong Kong.

The Hang Seng China-Affiliated Corporations

Index (HSCCI)
was
launched to provide a definition and
benchmark for investors interested in Red
Chips stocks.

The actual business is based in mainland China

and controlled, either directly or indirectly, by
the central, provincial or municipal
governments of the Peoples' Republic of China.
The word "red" represents the PRC and the
Chinese Communist Party.
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Securities Market in China

165
267
270
291
363
392
506
606
688
762
817

Current Constituents: 25
119
123
135
144

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Securities Market in China

836
883
941
966
992
1109
1114
1193
1199
1313
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As of Dec, 2012

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